UK: Surging inflation won't bring forward rate hikes - ING

James Smith, Economist at ING, explains that above-consensus UK inflation will test the patience of some of the Bank of England hawks, but ING thinks a household spending squeeze and elevated Brexit uncertainty mean we won’t see rate hikes until 2019.

Key Quotes

“The hawkish voters at the Bank of England have often talked of having “limited tolerance” to rising prices, and today’s jump in headline CPI to 2.7% from 2.3% will certainly raise a few eyebrows on the MPC.”

“Unsurprisingly, much of the pick-up is attributable to a rebound in air fares, which is linked to the unusually early Easter in 2016. There was also another steady pick-up in food prices, where the effect of the weaker pound is still outweighing the impact of a prolonged supermarket price war. But most importantly, that sterling impact saw a huge jump in core inflation from 1.8% to 2.4%.”

“Crucially, tomorrow’s jobs report is likely to confirm that prices are rising faster than wages. That appears to already be weighing on consumer activity: retail sales growth has slowed dramatically from almost 8% in October last year, to 2.6% in March.”

“For that reason, we don’t fully buy into the Bank of England’s latest signal that policy “could need to be tightened by a somewhat greater extent” than the path implied by markets. Even if the consumer slowdown ends up being less pronounced, the effect of Brexit uncertainty is likely to weigh on investment and hiring over the next few years. That means that a strong pick-up in wage growth, a key assumption underlying the Bank’s latest forecasts, may not materialise.”

“We don’t expect the first rate hike to come before Brexit talks conclude in 2019.”